THE PRIMARY, SECONDARY, TERTIARY AND

THE PRIMARY, SECONDARY, TERTIARY AND

QUATERNARY SECTORS O F THE ECONOMY

U S . Federal Reserve Board

The recognition of differences among the major sectors of the economy, such as agriculture, commerce,

or manufacturing, has a considerable tradition in economic thinking. Also, there is evidence that

important national and international predicaments of our time are closely related to sectoral-structural

developments. Yet economists in the developed countries are often disinclined to study the shifts

among the megasectors.

This paper suggests that an intensified study of the topic may be profitable. In order to support

this proposition it first reflects on the traditions of sectoral emphasis in literature. Second, it considers

the evidence for the ascendancy of the quaternary activities. Third, it deals with the input-output

relations among the four megasectors of the economy. Thereafter it points to the emergence of

potential inefficiencies among quaternary activities and raises the possibility of a megasector misequilibrium. Finally it outlines certain connections to the thoughts of Leontief and Sraffa; considers services

in the neoclassical framework; explores the relationships to institutional thought; and ponders the

extension of its basic hypothesis to the developing nations, the socialist countries, and to historical

analysis.

The ascendancy of service output for the 20th century and its growing share

in total activity is as important an economic development as the industrial

revolution and the growing share of manufacturing were for the preceding two

centuries. The transition from preponderantly agricultural to industrial economies

involved much economic, social and cultural stress within and among nations;

it would be naive for our age to expect a smooth transition to the service econo nies

in this and the next century. Many economic problems of our times are apparently

related to the sectoral structural shifts in modern economies and therefore this

topic deserves intensified study.

In particular we should understand better the input-output relationships of

the key sectors; the economic inefficiencies that may be related to sectoralstructural adjustment problems; and the challenges to economic thinking posed

by this major transformation of the world economy.

Unfortunately economists in the developed countries today are often disinclined to research the major sectoral-structural characteristics of production and

even to accept the existence of analytically useful industrial distinctions among

the main sectors of the economy.' Yet, making industrial distinctions among

*The views expressed in this paper are those of the author and do not necessarily represent

those of the Board or the staff of the Federal Reserve System.

'In the developing countries, and in the socialist economies, the sectoral structure of their

economies is more often analyzed mainly because of the needs felt for industrialization and the often

backward state of agriculture.

sectors has a considerable tradition in economic thinking. Such thoughts may

have been flawed, but nevertheless may have contained certain kernels of truth.

A search for these may be profitable.

The relative characteristics of major economic sectors, such as agriculture,

commerce and manufacturing, have been pondered by the mercantilists and the

physicocrats and since Sir William Petty's time eminent economists have often

devoted effort to evaluating the impact of shifts among major economic sectors.

The relative neglect of the subject in the last two decades is almost unprecedented.

The notion that different major economic sectors and activities may be of

varying importance for overall economic activity and well-being goes back to

preceding millenia. For example in ancient China usually four basic classes or

categories of people were recognized, and among these, persons involved in

agriculture were ranked higher than agents of commerce.'

In ancient Greece one finds similar distinctions in Aristotle, who accepted

agriculture and household management as honorable, but frowned upon certain

other activities such as trade and deplored moneylending because it involved

usury. Scholastic tradition in Medieval Europe followed in the footsteps of

Aristotle and canon law outlawed usury and denounced trade as a sinful occupation. "The scholastic Doctors extolled agriculture as an occupation leading to

virtue, but shared all the prejudices of Aristotle and of the Church Fathers against

trade."3 In later times Francois Quesnay in the famous Tableaux Economiques

(about 1756) suggested that the net product of society was produced by the

productive class (engaged in agriculture, fishing and mining), while the proprietary class (such as landowners) and the sterile or artisan class could serve

public purposes and at best would recover its outlay. In his scheme "the expansion

of the economy and the population therefore depended upon expansion of the

expenditure of the productive class and the resultant expansion of the net

produ~t."~

In England, well before Quesnay, already in 1691 Sir William Petty concluded

that "There is much more to be gained by Manufacture than Husbandry; and by

Merchandise than Manufacture . . . ."' But in 195i, some 260 years later, Colin

Clark correctly lamented "that most of the world still remains quite unaware of

the significance of Petty's brilliant and entirely correct generalization made from

2"

Among those who performed physical labor, farmers were held to be the most productive and

therefore their status came next to that of scholars. Artisans and merchants, whose efforts were

considered less productive, had an unfavorable position and were looked down upon by society,

especially by the intellectuals." Slaves, prostitutes, entertainers, music players-depending on regional

definitions-"were

considered non-productive and as making the least contribution to society."

T'ung-Tsu Ch'u "Chinese Class Structure and It's Ideology," in John K. Fairbank, Chinese Thought

and Institutions, the University of Chicago Press, 1973, p. 247 and p. 249. We also know of the Edict

of Emperor Wen on the Primacy of Agriculture in 163 B.C. and of other references regarding the

encouragement of agriculture. See Introduction to Oriental Civilizations, Sources of Chinese Tradition,

Vol. I. Chapter IX, The Economic Order, Columbia University Press (New York, 1960).

3 ~ a y m o n de

d Roover, Ancient and Medieval Thought in International Encyclopedia of the Social

Sciences, Volume 4, p. 432.

4~osephJ. Spengler, Physiocratic Thought in International Encyclopedia of the Social Sciences,

Volume 4, p. 444.

5 ~ Colin

n

Clark, The Conditions of Economic Progress, London, MacMillan and Co., Ltd., 1951,

p. 395.

the scanty facts at his disposal in 1691; and that many concerned with economic

policy still act as if they too were entirely unaware of what might be called, in

all fairness, Petty's law."6

Differences felt regarding the overall contribution of various types of

economic activities (or sectors) one way or another influenced the teachings of

the classical 19th century economists. Adam Smith, David Ricardo, Karl Marx,

John Stuart Mill, and others essentially accepted the doctrine of "material

production" which distinguished productive and non-productive activities on the

basis of their proximity (direct involvement) in the creation of physically tangible

output. The so-called historical school in Germany, on the other hand, took a

broader stance. Friedrich List, for example, "considered education, administration and communication to be historically important productive forces" as well.'

It is interesting that the work of List intellectually lead to the stages-of-growth

thinking of later times. Katouzian suggests that "List's descriptive scheme of

Agricultural, Agricultural-and-Manufacturing and Agricultural-Manufacturingand-Commercial stages of economic development can now be explained in terms

of the Primary, Secondary, Tertiary stages associated with the names of Allan

G. Fisher, Colin Clark and Simon ~ u z n e t s . " ~

The comprehensive concept of production became the prevailing one,

especially after Alfred Marshall's Economics of Industry was published in 1879.

And modern national accounting in the Western world has been based on the

comprehensive concept, except in the work of the Hungarian statistician Frederic

Fellner (1869-1944); and, of course, the national income calculations of the

U.S.S.R. and other socialist countries were based on the Marxian concept.

In the middle of the twentieth century the importance of the growth of

primary, secondary and tertiary industries, and of the shifts among them, were

given prominence by Colin Clark in his famous work The Conditions of Economic

Progress. Regarding the terminology itself Clark informs that

"the term tertiary industries was originated by Professor A. G. B. Fisher

in New Zealand, and became widely known through the publication of

his book, The Clash of Progress and Security, in 1935. It took its origin

from the titles current in Australia and New Zealand of 'primary

industry' for agriculture, grazing, trapping, forestry, fishing and mining,

and 'secondary industry' for manufacture. In Australia and New Zealand

these terms are not only used in statistical reference books but are widely

current in popular discussion. The phrase 'tertiary industries' therefore

immediately carries, in these countries, a suggestion of those excluded

by the official definition of 'secondary ind~stries."'~

'Clark, op. cit., pp. 395-396. In the third edition in 1957 Clark, though extensively praising Petty's

contribution on the subject, did not use the term "Petty's Law."

'The0 Suranyi-Unger, The Historical School in International Encyclopedia of the Social Sciences,

Volume 4, p. 455.

' ~ o m aKatouzian, Ideology and Method in Economics (New York University Press, New York

and London, 1980), p. 37.

'Colin Clark, The Conditions of Economic Progress, Third Edition (MacMillan, London, 1957),

p. 490.

Among 20th century researchers Simon Kuznets has been recognized as a

foremost authority in this field of study. Kuznets, in his study "Toward a Theory

of Economic Growth" summarized certain findings, based on the review of

long-term changes in the structure of production in the U.S. and abroad. The

first was, of course, the shift away from agriculture, as economic growth accelerated. Beyond that, he wrote in the early 1950s "Forthe more advanced countries. . .

we should also note some significant trends in the distribution of the nonagricultural sectors proper. The shares of mining and manufacturing in the total

labor force grew significantly, but the increases have ceased or slowed down

during the recent decades. The shares of the transportation and communications

industries in the labor force also grew but became stable after World War I or

even before; . . . The shares of trade and other service industries, a miscellaneous

group including business, personal, professional, and government services, have

grown steadily and have continued to grow in recent decades."1¡ã The basic thrust

of Kuznets' finding apparently remained relevant for the 1960s and the 1970s as

well and the many analytical points made by Kuznets continue to deserve close

attention.

However here our aim is not to review the existing literature, which includes

several seminal works by Leontieff, Fuchs and others. Rather we only recall the

sometimes neglected fact that earlier economists, for several generation, paid

considerable attention to sectoral-industrial problems. The earlier contributions

usually focussed on: (a) the importance of key sectors in various historical epochs,

(b) the delineation of productive from nonproductive labor, and (c) the identification of stages of economic growth. Intellectual efforts in these areas were

not unrelated to each other, but these broad topics were usually dealt with in

somewhat separate settings. Sectoral emphasis was mostly found in studies of

economic development and planning; the lines between productive and nonproductive activities were usually elucidated by national accountants; and the stages

of economic development were discussed in the framework of economic growth

theories.

The existence of a wide range of earlier literature relevant to the sectoralstructural issues reflects the existence of underlying real economic problems. It

would be difficult to imagine that the earlier thinkers' efforts were purely academic

in nature, with no connections to practical problems. On the broadest plane an

argument can be made that the emphasis first placed by early thinkers on

agriculture, then by economists of the first half of the nineteenth century on

materials production which also covered manufacturing and finally by most

representatives of the economics profession since the second half of the last

century on the comprehensive concept of production (which extended the scope

of production to services as well) corresponds to the successive expansion of the

nonagricultural activities in the Western economies.

It is a loss that the sensitivity of the earlier economists to the overall

significance of the differences in the major production sectors of the economy is

'O~uznets(1968), p. 25 (W. W. Norton, New York, 1968). First published in 1965 in his Economic

Growth and Structure (W. W. Norton, 1965), and written in the 1950s.

362

a trait that has mostly vanished from contemporary economics. Rather we should

relearn some of their sensitivity in order to understand better the economic shifts

of our own century and the structural perspective of the 21st.

Two general propositions basic to the study of sectoral problems are: First,

that the primary, secondary, tertiary, and quaternary activities of the economy

are sufficiently different from each other to permit their separation and comparative analysis; and second, that the overall growth rate and the efficiency performance of the economy are influenced by changes in the relative importance,

contribution, and input-output relationships of these four main sectors. In the

setting of the U.S. economy and statistics the four major activities and sectors

of the economy are postulated as follows:

Name

SIC Major ~ r o u ~ "

PRIMARY ACTIVITIES

Agriculture, forestry and fishing

Mining

SECONDARY ACTIVITIES

Construction

Manufacturing

TERTIARY ACTIVITIES

Transportation, electric, gas and sanitary services

Wholesale trade

Retail trade

QUATERNARY ACTIVITIES

Finance, insurance, and real estate

Services

Public administration

15, 16, 17

20 through 39

40 through 49

50, 51

52 through 59

60 through 67

70, 72, 73, 75, 76, and

78 through 89

91 through 97

Simon Kuznets, in terms of broadest groupings, focused on only three key

sectors: agriculture, industry, and services. However what he said about these

three sectors we can apply as criteria for the selection of broad groupings in

general: "The three major sectors do differ significantly from each other-in the

use of natural resources, in the scale of operation of the productive units common

to each, in the production process in which they engage, in the final products

that they contribute, and in the trends in their shares in total output and resources

used."'*

or

the coverage of each category see Standard Industrial Classification Manual 1972, Executive

Office of the President, Office of Management and Budget (U.S. GPO, Washington, D.C., 1972).

12Simon Kuznets, Modern Economic Growth (Yale University Press, New Haven, 1973), p. 87.

363

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